What is the explanation for the default risk of bond investment?

Default risk Default risk refers to the risk that the borrower who issues bonds cannot pay the interest or repay the principal on time, thus bringing losses to bond investors. Among all bonds, the government bonds issued by the Ministry of Finance are often considered as gilt-edged bonds by the market because of government guarantees, so there is no risk of default. However, bonds issued by companies other than local governments and central governments are more or less at risk of default. Therefore, credit rating agencies should evaluate bonds to reflect their default risk. Generally speaking, if the market thinks that the default risk of a bond is relatively high, then it will require the bond to have a higher yield to make up for the possible losses. Interest rate risk The interest rate risk of bonds refers to the risk that investors will suffer losses due to interest rate changes.

Undoubtedly, interest rate is one of the important factors affecting bond prices: when interest rate rises, bond prices fall; When interest rates fall, the price of bonds will rise. Because the bond price will change with interest rate, even the national debt without default risk will have interest rate risk. Purchasing power risk Purchasing power risk refers to the risk that the purchasing power of money decreases due to inflation. During the period of inflation, the investor's real interest rate should be coupon rate minus the inflation rate. If the bond interest rate is 10%, the inflation rate is 8%, and the real rate of return is only 2%, the purchasing power risk is the most common risk in bond investment. In fact, from the late 1980s to the early 1990s, due to the high inflation of the national economy, the national debt issued by China did not sell well. Liquidity risk Liquidity risk refers to the risk that investors cannot sell bonds at a reasonable price in a short time. If an investor meets a better investment opportunity and wants to sell the existing bonds, but he can't find a buyer who is willing to pay a reasonable price in the short term, and it takes a long time to find a buyer when the price drops to a very low level, then he will either suffer reduced losses or lose new investment opportunities. Re-investment venture investors can get three kinds of income from investing in bonds: bond interest; Bond trading income; Interest earned by reinvesting temporary cash flows (such as interest received regularly and principal repaid when due). In fact, the reinvestment risk is aimed at the third kind of income. In the next chapter, we will see that in order to achieve a return equal to that determined when buying bonds, investors must reinvest these temporary cash flows with a return equal to that determined when buying bonds. Operational risk Operational risk refers to the mistakes made by the management and decision-makers of bond issuers in the process of operation and management, which leads to the reduction of assets and the loss of bond investors.